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Prospects on Korean economy to worsen after impeachment

Nicole Han, Dec. 9, 2016, 9:31 a.m.

After a historic impeachment vote Friday, the Korean economy is expected to be thrown into a vortex of uncertainty amid aggravating concerns over sluggish exports and intensifying external volatility from foreign exchange and oil prices.

The National Assembly passed a bill to impeach President Park Geun-hye, suspending all her constitutional power. The ultimate fate of the embattled president will be decided by the Constitution Court. Meanwhile, Prime Minister Hwang Kyo-ahn will lead state affairs as acting president.

Related ministries and financial authorities held meetings right after the vote, seeking ways to contain any economic fallout and to strengthen the monitoring of internal and external factors on the market.

Finance Minister Yoo Il-ho met economy-related ministers and held a separate meeting with senior officials within the ministry to keep a close eye on reactions from international markets such as credit default swap premiums for South Korea’s sovereign bonds and non-deliverable forward.

He plans to meet representatives from the business and labor on Saturday to seek joint efforts to minimize the possible damage from the political crisis, according to officials. The minister will also speak with foreign correspondents on Sunday to assure the stability of the Asia‘s fourth-largest economy.

Financial Supervisory Commission Chairman Yim Jong-ryong, who has been tapped by President Park as the new deputy prime minister and finance minister, also urged officials to stay focused and pursue policy drives consistently.

“We have to review countermeasures for debtors facing a growing burden on repayments in the era of rate hike.“

The remark was referring to an added concern over a rate hike by the US Federal Reserve expected next week.

A US rate hike is likely to result in a foreign capital exodus from Korea, according to empirical data.

To prevent a massive exodus of foreign capital, the Bank of Korea could seek a rate hike. But such a decision could impose a heavier financial burden on households in debt, experts said. South Koreans have 1,300 trillion won in household debt.

The central bank also held an emergency meeting immediately after the vote to discuss measures to stabilize the markets.

“We will discuss how the vote result would impact the financial markets and seek countermeasures,” said an official, adding that they have already finished drafting a weekly-based scenario to stabilize the markets accordingly to the vote results.

The vacuum in the presidency, however, is likely to put South Korea in an unfavorable condition at a critical juncture, particularly in dealing with the new US administration to be launched by president-elect Donald Trump on Jan. 10.

Experts have already expressed concerns over a possible change in the economic relationship between Korea and US, citing Trump’s campaign pledges on rewriting the bilateral free trade deal.

Korean companies have been expressing fears about the rise of protectionism, not only from the US but also from Europe, aggravated by Britain’s departure from the EU in June. The absence of a state-run control tower for dealing with trade issues could further discourage Korean businesses’ operation overseas.

Some observers are worried that the political uncertainty could further drag down already shrinking shipments of Korean products as well as the domestic consumption, possibly driven by a rise in an anti-business sentiment.

An early presidential election is another burden for the economy.

If the Constitutional Court approves the parliamentary bill, the election will be held within 60 days, possibly in summer.

“It is impossible to set a New Year’s plan right now, when a presidential election is expected in a few months because it is difficult to predict how the situation would change,“ an industry source said, citing possible changes in tax rules and policy drives.

Analysts offer mixed prospects.

Some suggest modest short-term impact, referring to how the market reacted in the previous impeachment 12 years ago.

When lawmakers voted to impeach late former President Roh Moo-hyun on March 12, 2004, the benchmark Kospi fell 2.43 percent on the day to close at 848.80. However, it quickly recovered to pre-impeachment 900 levels.

Others, however, painted a bleaker picture, saying that the situation is different.

The growing political uncertainty is the biggest problem, with the consumption and corporate investments falling simultaneously.

Some expect that South Korea‘s economic growth in the fourth quarter will decline to near 0 percent, with households in debt reducing their consumption, and the companies delaying investment plans.

The state-run think tank Korea Development Institute sharply cut Korea’s 2017 growth outlook to 2.4 percent from an earlier prediction of 2.7 percent, citing sluggish exports and slowing private consumption. If political risks had been reflected, the figure would have gone lower, observers said.